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Commentary

Run with the Herd or Go against the Tide

Most of us make millions of decisions, small and big over our lifetime. As much as we believe in being individualistic, most of the decisions aren’t really different from decisions taken by the vast majority who are facing similar questions.

We hate to be told that we are following the herd when the reality is that we are part of the herd. Once in a way, some of the decisions one makes can go against the herd but unless the outcome is better, the decision is held up as the reason for not to sway away from the path taken by the majority.

But being part of the herd itself is not wrong by a long way. While Billionaire’s who dropped out of college are celebrated, not everyone who drops out of college actually succeeds by any distance let alone become a noted celebrity.

Being part of the herd also means that when one fails, one fails with the majority. Fund Managers for instance don’t want to go down the rocky path for what-if the path meets a dead-end. Career Risk means that most are more than happy to follow the path laid down by others for if there is a failure, he isn’t the only one caught in the storm.

Unfortunately the reason for such mockery for those who follow an alternative path is because it can be a long time to be seen as right. Warren Buffett was ridiculed for being old and unable to understand technology which would the driver of everything and was hot during the dot com bubble. Once the bubble popped, he of course was celebrated for being right.

But was he really right. 18 years post the dot com bubble, Infotech stocks are the leaders when it comes to the US Markets. Buffett missed them out before the bubble, during the bubble and post the crash as well.

Raghuram Rajan is celebrated for calling out the risks being taken by Banks and Insurance firms in the housing bubble. But it was 2 years before the issues he posed started to become a reality and nearly 4 before the world understood the implications of the risk he had laid out in his paper.

Timing the Top isn’t tough, it’s nearly impossible. The top happens due to a plethora of factors including sentiment and money flow that cannot easily be foretold. In fact, there is a saying that the bull market ends when the last bear gives it up while the bear market ends when the last bull throws in the towel.

There are people who are wrong some of the time, most of the times they being just early – being too early is as bad as being too late and there are another set of people who are consistently wrong.

One famous US bear is John P Hussman who has been bearish on the US Market since 2009. Everytime US markets go through a short term correction, his timeline becomes hyperactive as he tries to showcase how large this current bubble is and how based on earlier history, this is clearly not sustainable.

His charts aren’t the average technical charts for they are deeply interesting. But the reason they don’t work is that many of them are nothing more than curve-fitted and hence more liable to be wrong than right.

Earlier this month, he posted a chart which used a signal derived from 5 conditions. Since 1992, the chart showed 3 Signals – one at the peak of 2000, one at the peak of 2008 and the final one just before the intermediate peak of 2015. The final signal was now (October 2018).

Anyone looking at the chart and the accompanying narrative would be hard pressed not to agree with Hussman. Finally here is a indicator which has had great success in the past, has a logic that is tough to disagree with.

Yet, once again it was a curve fit chart. Someone who is a very well-known used the same conditions to test for a longer period – from 1932 to date and guess what, these were the only signals that you could find.

John Hussman not just preaches but practices what he preaches and the results aren’t surprising. He runs 3 funds targeted towards Equity and their 10 year returns are -7.27% and -7.60% even as S&P 500 ten year returns has been to the tune of 11.60%. Do note that S&P 500 returns are positive while the fund returns are negative – there is not even am iota of resemblance in between those returns.

Bad fund managers destroy capital. They seek out to be different from the herd but fail to recognize that in their pursuit to be different, they can also be wrong for so long that even if they are finally proven right, it makes very little difference for no one has the time frame or the ability to hold onto their investments for so long.

Hussman is an exception like none other. Most fund managers who end up losing money for their clients aren’t as consistently bad as Hussman. Some of them deliver incredible returns over a period of time but get carried away and end up destroying a large part of their client’s funds when the tide goes out.

The last few years have been a period of high tide and high returns for the vast majority. 2018 has turned out to be vastly different for those who mistook the tide for the sea for the sea never goes out, only tide does.

Caught in the draw-down of a nature many have only experienced only in charts and books, it’s interesting how every small straw is being clutched at, the government pleaded to act and those who were right (even if wrong for a long time) ridiculed.

Saurabh Mukherjea who came to fame in India during his stint with Ambit Capital is some- one who seems to be abhorred by the bulls. He is famed for his Sell call on BFSI (banking, finance and insurance) segment and even though he may claim to be right as BFSI’s stock keep tumbling, the fact remains that most of the stocks he disliked are still way way higher than where he gave out a sell call.

But that is not his only contribution. He was also instrumental in bringing the Coffee Can Approach to the retail audience. While he is no longer part of Ambit, the very fact that Ambit has chosen to use Coffee Can as a PMS product goes out to show the worthiness of the idea.

In his recent newsletter, he talks about Non Banking Financial Firms which are facing headwinds and claims that Investing in them is like playing the European Roulette because their basic model  is leverage and they go bust once in a decade (historically).

If one were to talk to any Bitcoin fanatic, I am sure he has the same thing to say about the whole money supply system – the fiat money is a farce and is unsustainable. I don’t know how this NBFC crisis will play out but one thing is for sure, the best of the companies will be able to wade through the crisis and emerge stronger.

The Dot com bubble killed many a me-too dot com firm but Amazon came out stronger. The Housing bubble nearly killed the Banking system but Goldman, JP Morgan among a couple of others came out stronger.

Closer home, the 2000 bull-run ended the life of many an Infotech company but Infosys came out stronger and better. Wipro the golden boy of those days survived but has never thrived (even today 18 years later, it’s still well below its all-time high set in 2000).

When bubbles burst, it provides a opportunity to pick dollars for nickels. But of course assumes you have the ability to differentiate between a Zimbabwe Dollar and a United States Dollar. It’s not even worth spending nickels on the former while it’s a great opportunity in case of the later.

If you have such expertise, now is the time to start digging for the proverbial pot of gold. If you don’t, you would save a ton of money not to speak about sleepless nights by waiting for the dust to settle and pick the winners.

The goal of investing isn’t to come first in a 100 meter race, it’s to finish (not win though everyone tries and wishes to win) the Marathon. That in itself is an achievement that very few can claim to achieve.

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